Labour Leader - Bonuses and the implied anti-avoidance term in Hong Kong

Bonuses and the Implied Anti-Avoidance Term

This note considers the position under Hong Kong employment law following this year’s decision in Tadjudin v Bank of America, National Association (2016). This judgment was of great interest to employers because, prior to the first instance decision in December 2014, the Hong Kong courts had not considered the existence of an implied “anti-avoidance” term in an employment contract.

In brief, the premise that an anti-avoidance provision may be implied into employment terms has been upheld. The findings on the facts, in summary, were as follows: in that plaintiff’s case, such an implied term existed; and that term had been breached, by a dismissal with the intention of avoiding the employee becoming eligible to receive a bonus.

Further details follow together with our commentary.

Background

Development of the anti-avoidance term: Hong Kong now leading the way

The principle of an implied term that prevents an employer from avoiding express contractual obligations by terminating an employee's employment was first developed by the English High Court. In 1996, in Aspden v Webbs Poultry & Meat Group, the High Court held that an employer could not terminate employment in order to avoid an employee’s entitlement to permanent health insurance. In 2002, in Jenvey v Australian Broadcasting Corporation, the principle was extended to prevent an employer from avoiding its obligation to make a contractual redundancy payment by communicating the dismissal as being for a different reason. In 2006, in Takacs v Barclays Services Jersey Limited, an attempt was made to extend this principle to bonus payments. At an interlocutory hearing, the High Court concluded that this was a developing area of the law and that the claimant had a “real prospect” of succeeding in his claim. 

The Takacs case did not, however, proceed to a full trial. Since then, the anti-avoidance argument has been described by some in the English employment law community as the “last remaining untested argument” available to former employees who wish to pursue a bonus claim. With the decision in Tadjudin, the Hong Kong courts are now, therefore, leading the way in this area. In this note we describe how the position has developed at common law in Hong Kong.

The Tadjudin case involved an analyst who had been let go by Bank of America (as it then was) in 2007, on the ground of having failed a performance improvement plan. The employer’s financial year ran from January to December, and the employee left in August. As is common in that sector, the Bank’s discretionary bonus scheme had been expressed to be subject to the plaintiff still being employed at the time payment would become due; so she was not paid a bonus for her final (part) year of employment. She claimed bonus for 2007 and underpayment of bonuses for 2005 and 2006. 

The lower court implied an anti-avoidance term, which should have prevented the Bank from exercising its right to terminate employment if a dominant intention was to avoid paying bonus. Notably, in the view of the lower court’s single judge, the Bank’s stated reason for dismissal had failed to stand up to scrutiny; the plaintiff’s line manager was viewed by the judge to have acted with “malice” by placing the plaintiff on the performance improvement plan. The judge concluded that the only reasonable inference to be drawn was that one of the dominant intentions of the plaintiff’s manager had been to avoid the plaintiff becoming eligible to receive a bonus for 2007. This intention was then attributed to the employer.

Although the judge found that the implied term existed and had been breached, and awarded damages for loss of bonus for 2007, the findings were not all negative for the employer because the claims in respect of bonus referable to previous years did not succeed. Out of a total of about US$3.7 million claimed, the plaintiff received around US$500,000.

On appeal, the employer argued that the lower court had been wrong in law to find an implied anti-avoidance term, and wrong in fact to find that the plaintiff’s employment had been terminated to avoid paying bonus. It also challenged quantum of damages. The plaintiff cross-appealed, against failure of her claims for underpayment of bonuses in 2005 and 2006, and she too challenged the decision on quantum for the 2007 bonus. 

Court of Appeal Decision

Disappointingly for Hong Kong employers, the Court of Appeal (CoA) supported the main points of the first instance decision; the details are summarised below.

Existence of an implied anti-avoidance term

A central question was whether the employer’s contractual and statutory right to terminate employment at any time, by giving notice or by making payment in lieu, should be read as subject to any implied restraints. Specifically, was there an obligation on the employer not to exercise such right in order to avoid the plaintiff becoming eligible to receive a bonus? 

Crucially, the CoA has chosen to agree with the initial finding that it is possible for an anti-avoidance term to be implied into a contract of employment. It found the following contextual background critical to its conclusion on the facts of the claim:

• the plaintiff had been employed in a highly competitive environment
• performance bonus had formed a major part of her remuneration (the CoA reiterated the observation of the judge at first instance that the salary was the “sauce”, while the bonus was the “meat”)
• an express purpose of the discretionary bonus scheme was to compete for business and talent
• the discretionary bonus scheme helped to attract and retain talent, and provided motivation to perform, and
• the employer had made clear that it was committed to a “pay for performance” policy, under which performance was a key consideration in determining remuneration.

In light of the above, the appellant court held that this former employee’s right to be considered for bonus was plainly intended to be an integral part of her remuneration package.

The court deemed the anti-avoidance provision necessary in order to give effect to the “common, reasonable expectation of both [the employer] and the plaintiff” that the employer could not exercise the power of termination in the plaintiff’s contract in order to avoid the plaintiff becoming eligible for a bonus. Otherwise, the plaintiff’s contractual right to be eligible for consideration for bonus would become illusory and could easily be taken away, even if the employee was without fault, which the court considered would be unreasonable and inequitable.

Breach of the implied anti-avoidance term

The higher court proceeded on the basis that, in order to overturn any findings of fact or any inference drawn by the lower court, it would have to be satisfied that the original decision was “plainly wrong” (ie that no reasonable judge would have reached the same decision); this is a high threshold which the court declined to find had been reached.

The CoA decided that it was therefore required to recognise the original judge’s findings of fact, to the effect that:

• the plaintiff’s line manager had been motivated by malice when he placed the plaintiff on a performance improvement plan and in his conduct of that plan, and
• it was then appropriate to attribute that malice to the employer.

The appellate court also upheld the inference that one of the dominant intentions in dismissing was to avoid the employee becoming eligible to receive a bonus. The court concluded that “[w]e do not think it could be said that this is an inference no reasonable judge could have drawn.”

The finding of malice had been in our view one of the more questionable aspects of the original decision. Given however the high bar for overturning findings of fact and inferences, this aspect of the upper court judgment was perhaps unsurprising, if not close to inevitable.

Other points

The following points arise from the CoA decision:

• The CoA was at pains to emphasise that the anti-avoidance term was implied into that plaintiff’s contract, based on the specific facts of the case. It stated that it was not necessary for the court to decide whether an anti-avoidance term should be implied into employment contracts more generally. 
• This is potentially helpful for employers in limiting the extent of the effect of the ruling. For those within finance and asset management sectors, it however provides less comfort, especially for client facing employee roles. Many of the factors that led the CoA to imply the anti-avoidance term into the contract will be common to all or most of their front office employees and senior back office persons.
• In reaching its conclusion as to the existence of the implied anti-avoidance term, the CoA stated that it was consistent with what the CoA regarded as the legal principle that an apparently unqualified right (in this case, the right to dismiss on notice or by payment in lieu) should generally be construed as subject to the requirement that it can only be exercised in good faith, rationally and for proper purpose, and not arbitrarily or capriciously or in bad faith. 
• Whilst these fetters are already well established and understood in the context of exercise of an employer’s discretion, their application to an unqualified contractual or statutory power to dismiss is a new development. If, as the CoA suggests, the power of dismissal should only be exercised in good faith, rationally and for proper purpose, this could be construed as a step by the courts towards developing common law protection against unfair dismissal in Hong Kong (which currently has no such legislative provisions).
• The CoA clarified that the anti-avoidance term is a freestanding implied term, insofar as it is separate from and not derived from, the implied duty of mutual trust and confidence. 

Conclusions

We suggest that employers should note the following points:

• Before any dismissal, an employer must carefully consider all facts and assess whether they could give rise to an inference that there is a dominant intention to avoid an employee being eligible for bonus. 
• An employer is likely to be best placed to defend an allegation that it has breached an implied anti-avoidance term if it has a genuine reason for dismissal (which is unrelated to bonus), and has followed a well-documented process with oversight of decisions by HR or another manager. 
• The risk of a claim could increase for terminations which occur close to the end of a bonus year and/or a bonus payment date.
• The case is also a reminder that the intention of an individual manager may be attributed to the employer, even if an action does not reflect the actual intentions of members of senior management. 
• Employers should review template employment terms and policies and consider including express provisions to assist the argument that their rights to dismiss are not qualified by any implied anti-avoidance term.